Western Governors University (WGU) ACCT2350 D774 Intro To Business Accounting Practice Exam

Explain the direct method for the statement of cash flows.

Presents cash receipts and payments for operating activities. Starts with net income and adjusts for non-cash items. Reports only investing activities. Reconciles net income to cash provided by operating activities by itemizing reconciling items.

Correct Answer:

Presents cash receipts and payments for operating activities.

Explanation:

Direct method presents cash receipts and payments for operating activities. It lays out the actual cash inflows and outflows from day-to-day operations—cash collected from customers and cash paid to suppliers, employees, and other operating expenses—so the cash effects of operating activities are shown directly. This contrasts with the indirect method, which starts with net income and adjusts for non-cash items and changes in working capital to arrive at cash flow from operations. The other descriptions align with the indirect method or with presenting investing activities, not with the direct method's approach.

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